Geopolitical jockeying at Colombo financial city

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Port in a storm

The Seema Malaka Temple on Beira Lake in Colombo, Sri Lanka. Klemen Misic/Shutterstock

Falling like a droplet from the eastern face of India, Sri Lanka shares many strong links with its mighty neighbour. Sinhalese and Tamils, the main two ethnic groups in Sri Lanka, acknowledge India as the home of their religion (Buddhism and Hinduism respectively) and language, while cultural ties range from a passion for cricket to a shared penchant for spicy curries.

In Sri Lanka’s capital, Colombo, auto rickshaws and architectural remnants of British colonialism carry the unmistakable scent of South Asia. Down by the city’s waterfront, however, a growing tract of reclaimed land serves notice of a frequently problematic new special relationship: the one being nurtured with China.

It is here, just north of the famous Galle Face Green, an old colonial recreation ground, that Colombo Financial City, an ambitious USD1.4billion new mixed-use city of residential skyscrapers, business HQs, hotels, public spaces, entertainment attractions and shopping malls, is now taking shape.

When complete, the shiny new enclave is expected to provide a major fillip to Sri Lanka’s status in the region. It is likely to bring a massive upsurge in Foreign Direct Investment (FDI) to the country and has the potential to transform Colombo into an international logistics and transhipment hub. Sri Lanka expects the FDI total to top USD13 billion.

The project will be a key plank of the Western Region Megapolis Project – an ambitious 15-year, US40 billion urban development initiative covering Colombo and its suburbs.

More: Sri Lanka’s first ever 7-star luxury apartment complex is underway

Experts, meanwhile, say the residential component of Colombo Financial City will also provide a huge shot in the arm to the real estate sector in Colombo.

“We expect that it will provide positive impetus, particularly in our attempt to preposition Colombo as the most livable city in the Indian Ocean region,” says Nayana Mawilmada, head of investment of Western Region Megapolis Planning Project (WRMPP). “The new financial city is going to generate jobs and that will have a positive effect on the market in other parts of central Colombo.”

Yet to say that the project has not been without controversy would be an understatement akin to saying that the traffic in Colombo can get a little hectic at times. Much has been written by critics about its feasibility or lack thereof, possible environmental harm and other costs involved. By far the biggest fly in the ointment, however, has been has been the involvement of China – the project is nearly 100 percent Chinese funded – and its implications for the delicate geopolitical balance in the region.

Colombo at sunset. PhilipYb Studio/Shutterstock

The roots of the storm go back to 2011 when pro-China former Sri Lanka president Mahinda Rajapaksa conceptualised the project, then known as Colombo Port City, and turned to his allies in Beijing to help turn it into a reality. In addition to the projected astronomical returns on its FDI, China would under the original plan be granted 50 hectares of permanent freehold rights.

India was unsurprisingly rather miffed about the prospect of having a powerful Chinese outpost station a couple of hundred kilometres from its southern coast. Fortunately for New Delhi, China’s gamble on Rajapaksa backfired when he was turfed out of office in 2015.

More: Sri Lanka withdraws freehold land offer to Chinese developers

His replacement, President Maithripala Sirisena, immediately aligned himself with India and vowed to review all projects awarded to Chinese firms. For a while, the future of Colombo Financial City appeared to be hanging by a thread. After a series of stops and starts and no small measure of geopolitical jockeying, however, Colombo Financial City is back online.

The Chinese (specifically state-owned China Harbour Engineering Company, master developer of the project) will no longer be granted freehold rights to any land and will instead benefit from a, still generous, 99-year lease agreement.

“The economic imperatives were critical for the U-turn on Colombo Financial City project and other Chinese funded infrastructure projects,” says Dushni Weerakon, deputy director at the Institute of Policy Studies of Sri Lanka. “Sri Lanka needs hard cash and China is the main source of such funding today and for years to come for many countries in the region.”

So, was it a case of plucky Sri Lanka buckling to the irresistible lure of the mighty renminbi? Not exactly, say experts.

More: More Sri Lankans are abandoning tradition and leaving home

India has pledged upwards of USD2 billion to Sri Lanka over the next few years, and Colombo Financial City is by far the biggest investment project that Sri Lanka has going.

Meanwhile, in September 2016, Yi Xianling, China’s ambassador to Sri Lanka extended an olive branch to India, inviting it to help build the city.

“Sri Lanka’s relations with both India and China are crucial – neither can be ignored and neither can be favoured at the expense of the other,” says Deshal de Mel, a senior economist at Hayleys PLC in Colombo.

“It is essential that Sri Lanka does not try to play one off against the other, and instead focuses on working according to a transparent rule based framework for its dealings with each country.”

With the country’s current government showing a clear intention to pivot back towards New Delhi, Sri Lanka’s ties with India seem to be reassuming a familiar solidity. But with China’s financial overtures impossible to ignore, the terms of old alliances in South Asia appear to be altered forever.

Read next: Is Sri Lanka’s commercial capital ready to welcome overseas investors?

is a Bangkok-based writer who has spent the past six years living and working in Southeast Asia. He regularly contributes to a variety of online and print publications including BBC, Esquire and Travel + Leisure